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FRBSF ECONOMIC LETTER
2015-35
November 23, 2015
Pacific Basin Note
Global Fallout from China’s Industrial Slowdown
BY
MARK SPIEGEL
China’s demand for imports helps support the global economic recovery, so China’s recent
economic slowdown has caused international concern. China’s slowdown is concentrated in the
industrial sector, while its emerging service sector has shown much new strength. However,
China’s service sector is relatively closed and relies only modestly on imports. Accordingly,
service sector growth is unlikely to offset the adverse implications of a slowing China for global
trade.
The recent slowdown in China’s economic growth has caused a great deal of concern, particularly among
global trade partners that export to China. On November 3, China’s President Xi Jinping announced that
expected real GDP growth over the next five years would be no lower than 6.5%, which is one-half
percentage point lower than the previous estimate. The industrial sector has been particularly weak as it
has expanded by only 0.2% over the past year. In addition, imports to China continue to fall dramatically,
as shown in Figure 1. Import values in October 2015 were almost 19% lower than they were in October of
the previous year.
However, a number of analysts (for example, Lardy 2015) have argued that concern about the slowdown in
the Chinese economy—and the associated reduction in Chinese imports—is overblown. Instead, they point
to the resilience in the country’s service sector. This sector has indeed been a source of relative strength,
with reported growth of 11.9% over the
Figure 1
past four quarters.
China’s sectoral output and total value of imports
In this Economic Letter, I show that the
strength of China’s service sector is not
likely to provide much support for gross
exports from the rest of the world over
the short term. The steep recent decline
in China’s imports is consistent with the
country’s growth pattern across
different sectors. There has been a
strong positive relationship between
slower growth in gross imports and
slower growth in industrial output over
the past 15 years. However, imports and
service outputs do not show a significant
relationship. These results hold both for
imports from non-commodity exporting
advanced economies and for advanced
Index
130
Service
120
Overall output
Agri.
110
Industrial
100
90
Imports
80
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Source: CEIC and IMF Direction of Trade Statistics.
Note: Quarterly output levels for agricultural, industrial, and
services sectors. Data are indexed to 100 at 2013:Q1 and
seasonally adjusted.
FRBSF Economic Letter 2015-35
November 23, 2015
and emerging market economies that export commodities to China. Therefore, from the rest of the world’s
point of view, an increase in China’s service sector does not offset a similar magnitude decline in its
industrial sector.
Recent sectoral growth patterns
Reports suggest China’s growth slowdown has been relatively moderate to date. However, some people
have argued that China’s slowdown may be even steeper than reported, in keeping with long-standing
skepticism about official Chinese data. In 2007, current Premier Li Keqiang reportedly said that, rather
than looking at officially reported output data, his province’s government focused on alternative
indicators, mentioning three: electricity consumption, the volume of rail cargo, and the amount of loans
disbursed. He added, “All other figures, especially GDP statistics, are ‘for reference only.’” (Wikileaks
2007).
Since that time, a number of alternative indicators of Chinese activity have been produced (for example,
Fernald, Hsu, and Spiegel 2015) based on movements in alternative indicators of Chinese activity that are
less prone to manipulation. These indicators suggest lower levels of growth than the officially reported
statistics. For example, the Fernald et al. preferred indicator series calculates that Chinese output for the
second quarter of 2015 fell short of the officially reported 6.9% growth figure, growing less than 6% over
the previous four quarters.
However, some researchers argue that these alternative indicator series are subject to negative bias due to
China’s structural transformation emphasizing more domestic demand for services. For example, in a
recent New York Times article, Nicholas Lardy (2015) argues that “naysayers” are excessively focused on
the weakness in China’s industrial sector and its low electricity consumption. With a greater share of
spending now focused on services, Lardy argues, “Assuming that electric power growth is a good proxy for
China’s overall economic expansion is like trying to drive a car by looking in the rearview mirror.”
China’s output has indeed tilted towards services over the past five years. The service sector as a share of
China’s overall output has increased from about 44% in 2010 to 50% in the latest quarter. The country’s
“tertiary” sector, which primarily reflects services, has also been strong relative to other sectors. As shown
in Figure 1, the growth in China’s service sector has been much higher than its growth in either the
agricultural or industrial sectors, and has moderated the recent overall GDP slowdown to 6.9% growth
(black dashed line). Over the past four quarters, the agricultural sector grew 4.8% and the industrial sector
grew a mere 0.2%, while the service sector grew a remarkable 11.9%.
Service sector output and imports
While strong service sector growth should mitigate the adverse implications of the steep decline in the
industrial sector, it is unlikely to provide much support for China’s imports. The service sector relies much
less on imported intermediate inputs than other sectors. The agricultural and industrial sectors use a
larger share of these imports than they contribute to total output; by contrast, the service sector accounts
for very little international trade, with its share of imports only 0.3 times the size of its share in output.
This pattern has resulted in a close correlation between China’s imports and output growth in its industrial
sector, and almost no correlation between imports and service sector growth. Figure 2 shows the
relationship between imports and these two sectors from the first quarter of 2000 through the second
2
FRBSF Economic Letter 2015-35
November 23, 2015
Figure 2
Changes in China’s imports and sector outputs
A. Industrial sector
B. Service sector
Imports, four-quarter % change
50
50
Imports, four-quarter % change
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
0
5
10
15
20
25
Industrial sector, four-quarter % change
30
0
5
10
15
20
25
Service sector, four-quarter % change
30
Note: Imports are inflation-adjusted change in imports to China from the United States, euro area, and Japan
by sector, 2000–2015.
quarter of 2015. The vertical axis on each panel shows four-quarter growth in imports from a group of noncommodity exporting advanced economies—the United States, euro area, and Japan, which constitute 35–
40% of world exports to China. The horizontal axis shows four-quarter output growth in the industrial
sector (panel A) and the service sector (panel B).
The fitted lines indicate that a relatively strong positive correlation exists between imports from this group
of countries and growth in China’s industrial sector, but the relationship between imports and output
growth in the service sector is far more tenuous.
To examine this relationship more formally, I conduct statistical regression analysis to determine whether
changes in imports move in the same direction as changes in output from each sector. For part of the
analysis, I include China’s real exchange rate to check the robustness of the findings, as movements in this
rate are likely to influence imports through the terms of trade. I use four-quarter growth data to account
for the increase in the relative shares of China’s service sector activity caused by normal business cycle
changes over the course of the sample and to avoid seasonality issues.
Regression results in Table 1
represent the sensitivity of
growth in Chinese imports to
growth in the sector indicated
in each column. Asterisks
represent statistical
significance, as noted in the
table. The regression results in
the table confirm the patterns
in Figure 2. Changes in
imports from the group of noncommodity exporting
advanced economies are quite
3
Table 1
Regression results:
Impact on China’s import growth from growth in sectors
Growth by sector
Agricultural
-0.03
(-0.15)
-0.28
(-1.25)
Industrial
1.51***
(5.04)
1.57***
(4.71)
Service
-0.32
(-1.06)
With change in real
exchange rate
2.01***
(4.31)
-0.89**
(-2.79)
Note: Imports reflect four-quarter growth from the United States, euro area, and
Japan. Regression results calculated with and without four-quarter growth in
China’s real exchange rate, data from 2000:Q1 to 2015:Q2. T-statistics are in
parentheses. *** indicates statistical significance at 1% confidence level; ** at
5% confidence level.
FRBSF Economic Letter 2015-35
November 23, 2015
sensitive to changes in industrial sector growth and move in the same direction. Given a one-standarddeviation decrease in growth in China’s industrial sector—6.3 percentage points in this sample—imports
decline 9.5 percentage points. In contrast, there is a negative but not always statistically significant
relationship between imports and growth in the service sector in the base specification. Growth in the
agricultural sector does not have a significant impact on Chinese imports.
Impact of service sector growth on imports from commodity exporting countries
Those concerned about China’s slowdown are also worried that it would adversely affect countries that
export commodities to China—particularly some fragile emerging market economies. The concern is that
lower demand from China could trigger financial disruptions and currency devaluations in those countries.
I therefore repeat the statistical exercise for other groups of countries that may be negatively affected by a
China slowdown. In particular, I concentrate on commodity exporting countries, as China is a key importer
of commodities. To identify commodity exporting countries, I use the United Nations Conference on Trade
and Development data set and select countries whose net exports excluding trade in food exceed 0.5% of
their GDP. I then separate these countries into an advanced economy group, which includes Australia,
Canada, Iceland, and Norway, and a much larger group of commodity-exporting emerging market
economies, which are listed in the online Appendix, along with detailed regression results for these
alternative samples.
Results for these commodity exporting countries are similar and even stronger than for the earlier group.
Imports from commodity-exporting emerging markets show significant decreases, moving in the same
direction as China’s industrial sector, with an estimated sensitivity of 3.9, more than double the estimate
for the group in Table 1, whether or not the real exchange rate is included. Again, import growth from the
commodity exporting group of countries falls as service sector growth rises, with a significantly negative
coefficient of –1.7 without and –2.1 with the inclusion of the real exchange rate. This negative result is not
surprising if the service sector is growing in part at the expense of the import-intensive industrial sector.
For commodity exporting advanced economies, I obtain similar significant and positive coefficient
estimates for industrial sector growth, of 1.5 without and 1.6 with the inclusion of the real exchange rate,
while service sector growth is insignificant.
Conclusion
The results in this Letter suggest that the steep decline in growth in China’s industrial sector has likely
been a prominent reason for the steep recent decline in China’s imports. In contrast, the strength in the
service sector is unlikely to provide much support for countries that export commodities to China. From
the view of an exporter, a dollar of increased service sector activity is unlikely to fully compensate for a
dollar of lost industrial sector output.
One important note is that these results concentrate on gross imports into China. This is an appropriate
measure for gauging the immediate disruption of trade patterns from the Chinese slowdown. However,
over the medium and longer terms, the changes in Chinese economic activity on net trade patterns should
be more important. As China’s economy turns towards serving domestic consumption, it is likely to rely
less on exports as its engine of growth and its trade should become more balanced. Therefore, the
4
1
FRBSF Economic Letter 2015-35
November 23, 2015
reallocation of growth towards China’s service sector should have more benign medium-term
implications for its trade partners.
Mark Spiegel is a vice president in the Economic Research Department of the Federal Reserve Bank of
San Francisco.
References
Fernald, John, Eric Hsu, and Mark M. Spiegel. 2015. “Is China Fudging Its Figures? Evidence from Trading
Partner Data.” FRB San Francisco Working Paper 2015-12. http://www.frbsf.org/economicresearch/files/wp2015-12.pdf
Lardy, Nicholas R. 2015. “False Alarm on a Crisis in China.” New York Times, August 26.
http://www.nytimes.com/2015/08/26/opinion/false-alarm-on-a-crisis-in-china.html
Wikileaks. 2007. “Fifth Generation Star Li Keqiang Discusses Domestic Challenges, Trade Relations with
Ambassador,” March 15. http://wikileaks.org/cable/2007/03/07BEIJING1760.html
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